Can you believe Wall Street?

Commentary: Ten years ago, infamous Enron began to crumble

It was just about ten years ago that the company began to crumble, even though this dubious anniversary has been almost completely overlooked by our collective focus on the 9-11 terrorist attacks. Yet that’s a shame: Enron’s demise was a Very Big Deal in the financial world, setting the stage for no end of collective teeth gnashing on Wall Street and promises to clean up their act.

But how much has that act really cleaned up over the last ten years?

You be the judge.

Prior to the Enron debacle, of course, the analyst community was notorious for never coming across a stock they didn’t like. Their aversion to rating a stock a “sell” was perhaps no better illustrated than by their behavior in the weeks prior to Enron’s bankruptcy filing: Even after it had become clear to a growing number of observers that company was in deep trouble, the worst that any analyst could bring himself to say about the company’s stock was that it was a “hold.”

It reminds me of Woody Allen’s classic line that an investment adviser is someone who helps us with our money until it is all gone.

Today, despite all the legal and regulatory changes that have been put in place since then, it still appears to be standard practice to see the world through rose-colored glasses.

This was well pointed out a week ago in a piece by fellow columnist Robert Powell, who reported the results of a fascinating study by S&P’s Sam Stovall on the distribution of current Wall Street analyst ratings on stocks in the S&P 1500 index. Three quarters of those ratings were in the favorable category—either “buy” or “buy/hold.”

If you want objectivity from an analyst, you might want to start by demanding that he issue as many “sell” recommendations as “buys.” After all, unlike the children of Lake Woebegone, not all stocks can be above average and outperform the market.

Consider investment newsletters. Whatever else you might be tempted to say about letter editors, no one can argue that they have a problem with saying “sell” as often as “buy.” I should know, since I have been tracking investment newsletters for more than three decades.

Take a look an the “Sentiment” chart which appears on the MarketWatch webpage that pops up whenever you type in a ticker, comparing the analyst community to the newsletter consensus (which is represented by “Hulbert Interactive” on the chart). In almost all cases, you will find the analyst consensus to be far more bullish.

This isn’t to say that investment newsletters always beat Wall Street. But even when they don’t, their willingness to say “sell” can be a healthy antidote to Wall Street’s endemic optimism.

Just remembering to do that would be a fitting 10-year anniversary celebration of Enron’s demise.

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